Monday, 4 April 2011

Another 15p a Bottle - Time to Trade Up

Last week's budget announced that duty on wine will continue to rise at the 'escalator' rate established by the last government of 2% above the rate of inflation until 2015.  With the retail price index (RPI) currently at 5.5%, that means a whopping 7.5% hike, increasing the duty by 15p a bottle (including VAT) from £2.03 a bottle to £2.18.

This 15p hike follows in the footsteps of similarly large rises each year since 2007, which have taken the duty per bottle from £1.57 to £2.18 in just four years, a massive 39% rise as shown below:

Ouch.  Of course the £2.18 just accounts for the duty that the government takes from each bottle.  The remainder of the bottle price is subject to VAT too, which is a particularly painful double-whammy since the increase in VAT to 20% this year.  This now means that over half of a £5 bottle of wine will be tax (£2.65),  leaving just £2.35 for your retailer to play with to buy the wine, ship it to the UK, get it on their shelves and make some profit.  If we then take away 30% profit margin (typical for wine in the UK off-trade) and a conservative 50p cost to get it on the shelf, that leaves a fairly scary £1.80 ex-cellar cost (the cost of the bottle from the producer at source) for a bottle retailing at a fiver.

But wait a minute, if we look at wine from the Eurozone we've actually got a triple whammy here; over the last four years, just to compound the pain, not only have duty rates dramatically risen and VAT gone up but the cost of €1 has also gone up sharply over the same period from an average of 68p in 2007 to 85p in 2011.  You can see that increase below:

If we use the previous example of the ex-cellar cost of a bottle of wine retailing at £5 (using the 30% profit margin and 50p shipping model), and look at how that has changed over the last few years (with changes in exchange rate, duty and VAT), we end up with a fairly horrible graph:

Very nasty.  This shows a retailer used to be able to spend nearly €3 a bottle in order to retail it for £5, but now they will only be able to spend practically half of that to sell at the same price.  This figure of less than €1.60 is the cost of a finished bottle, including all the packaging elements of the bottle itself, the label, the closure and the cost of the bottling process.  All that will cost the producer a fair few euro cents per bottle, which leaves how much of the €1.60 for actual wine?  Not much at all I'm afraid.  A fiver doesn't cut it any more for a quality bottle of wine.  It just doesn't add up.  Sorry about that.

Let's look at this the other way round and see how much would we have to pay for a bottle that's been bought at a reasonable ex-cellar price.  Well, if we take a price of €3.50 (which gets a fairly decent bottle when buying wholesale and not subject to local taxes), then our historical graph looks like this:

So back in 2004 a retailer used to be able to sell a bottle that cost them €3.50 for about £5.50, but a bottle costing them the same amount after the budget comes into effect this month would probably be sold at over £7.50.

Having looked at the real-price hike that's taken place in recent years, let's finish by coming back to the current duty rate of £2.18 a bottle and 20% VAT and see the split between tax and retail takings at different price points:

Blimey.  As you can see, a retailer only gets to keep the majority of the takings when the bottle price goes over £5.50 and only starts to make £4 on a bottle when the retail price hits £7.  The scariest figure is of course at the bottom, where for a £3 bottle of wine, which you really shouldn't ever buy, all but 69p is taken up by tax!  If we follow the same model of 30% profit and 50p shipping then at the current exchange rate that would allow a whole 2 euro-cents Ex-Cellar cost for a wine from the Eurozone selling at £3.  Nice.

This picture nicely shows us that it's at the retail price points between £5.50 and £20 that the relevance of the tax fades away from 50% of the total cost down to 25%, by which point the retailer takes £15 of a twenty quid bottle, allowing them to buy some excellent wine.   It's in this band that the money the retailer can spend on wine really shoots up to a significant amount.  Consequently it's this price range that you will often find the best value to be had and every extra quid you can spend (certainly up to about £15) is usually worthwhile.  After you cross £20 you will still get an intrinsic rise in quality, but other factors (kudos, brands) start to have an increasing importance.

I'm not going to judge whether we should be paying high duty on wine or not.  I'll leave the politic of the morality of sin tax, how to combat binge drinking and the cost of alcohol to the NHS to one side - I can see the argument both ways.  Instead what I am saying is that simply taking the reality of the high duty, the VAT and the exchange rate, all consumers should be aware of how much they need to spend in order to get a reasonable bottle (with some joyful exceptions of course).  That now starts at about £7.

5 comments:

  1. Great article Hugo
    Here in the 'new world' Down Under, we have a complicated tax regime on alcohol which in its simplest terms is related to price. The higher the basic cost, the more tax of various sorts is added on. So, a cask of inexpensive wine attracts less tax add ons than an expensive bottle of wine. There is debate as to whether this should be changed to a "volumetric tax" based on quantity with further classifications added according to type of product. If adopted, it is generally thought that the price of bulk alcohol products would rise more sharply in relative terms than the already expensive products. There is some support for this proposed move from health authorities which believe that bulk alcohol contributes to the greatest amount of alcohol related medical conditions.

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  2. Thanks for that Tim. Yes, there are arguments both ways for duty being a % of cost or volume. With the volume system we have in the UK it clearly means that for the savvy punter the best option is to trade up a bit, ideally buying everyday wine from about £7 a bottle if you can afford it. The scary thing is that there is still loads of £3 wine even though there is effectively no money in the price for the actual wine in the bottle!

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  3. Fine article Hugo
    The aging oenophile has always had a problem of when to stop buying new wine to add to his cellar or buy smaller quantities for more immediate drinking.I will now start to trade up with small quantities! The younger connoisseur is faced with a dilemma in this tax climate.
    Worrying trends from these parts smaller vignerons (who sell to the big producers) they are said to be looking for buyers for their vineyards and in some cases only half the vines have been pruned this year due to the cost of fuel and labour. It's a very close knit brotherhood. John. PS Any comments on the Cork v Screw Cap?

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  4. Thanks John. It sounds rough for the smaller vignerons; I really hope they get through the tough times.

    Thanks for the cork vs screw cap article - as it happens I'm in the middle of writing a post on the subject of closures, so receiving that was very well timed. I should publish it in a couple of weeks.

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  5. [...] pleasant reading that.  When you look at a previous post I wrote on the problems of sub £7 wine you realise the extent of the problem.  At £4.47 the average UK bottle price is clearly lower [...]

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